Idle federal workers are not the only ones feeling the strain from the US government shutdown, now in its second week. Investors are, too.
Washington’s role as official data provider, regulator and policy maker is on hold. That, as well as the separate risk of failure to raise the debt ceiling possibly triggering a US default, is beginning to unsettle financial markets.
Holes in the economic calendar have robbed traders of opportunities, causing volumes in some areas of the markets to nosedive. CME eurodollar futures volume totalled just 1.5m contracts on Friday, when the government’s employment report would normally have been released. Some 3.8m contracts were traded when the monthly report was last released in early September.
The disruption has wider implications. Since the monthly payrolls data also inform the Federal Reserve’s decisions on monetary policy, a sustained absence could lead to delays in any slowing – or “tapering” – of the central bank’s emergency asset-buying programme.
David Ader, strategist at CRT Markets, says the delay in the data “makes it unlikely the Fed will have enough information to make any tapering decision in October.”
In corporate debt markets, too, new offerings have fallen sharply. Borrowers have sold about $11.5bn of investment-grade bonds in the US in the first week of October, down from $35bn in the preceding week, according to Dealogic.
In the “junk” bond market, sales have collapsed, with only four deals worth $1.1bn taking place, down from $17.8bn in the last week of September.
Analysts say the shutdown has made it harder to gauge the future path of interest rates, a crucial consideration for investors and companies wanting to borrow large sums.
“Markets have become very thin and not having access to data, such as the monthly payrolls report, changes the dynamics of trading,” says Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.
US stocks have so far showed little reaction to the budget impasse. The benchmark S&P 500 index has declined just 0.3 per cent since last Monday.
However, the CBOE Volatility Index (Vix), a measure of implied volatility called the Wall Street “fear gauge”, has jumped 35 per cent in the past 10 trading days to its highest since June. Richard Repetto, analyst at Sandler O’Neill, says that a jump in Vix futures contracts trading has proven the exception to a slight across-the-board decline in exchange volumes.
The vetting of new stock listings has also slowed down at the Securities and Exchange Commission. The agency is keeping the doors open with “carry-over” funds, but Michael Zeidel, a capital markets attorney at Skadden, Arps, Slate, Meagher & Flom, says: “The more uncertainty there is, the more difficult it will be to get a deal out.”
The SEC’s counterpart in commodity and derivatives markets, the Commodity Futures Trading Commission, has been operating with fewer than 30 out of 600 staff. Last week it stopped publishing so-called commitments of traders reports, widely followed tables showing whether merchants and speculators are net bullish or bearish in markets from oil to Treasury bond futures.
In grain markets a pair of high-impact reports from the US Department of Agriculture will not be released as scheduled this week. In lean hogs futures, exchange operator CME Group has invoked a “force majeure” clause letting it change final settlement procedures in the absence of government-reported prices.
Some are taking alternative steps. Cargill, the world’s top agricultural trading house, has adopted a combination of private reports and dated government figures to price pig purchases. “If you and Cargill are not able to successfully negotiate a base price for a particular load, you would be able to market that load to another swine processor,” it told livestock farmers in a letter.
That approach is being mimicked elsewhere. Larry Kantor, head of research at Barclays, says analysts are paying more attention to private economic releases, such as the monthly snapshot of US private employment released by ADP, as an alternative to government data.
The risk, though, is that all the uncertainty could lead to more serious asset price falls, especially if there is no political deal on the debt ceiling by October 17, the point at which the US Treasury will run out of money to meet debt obligations.
Mr Kantor says. “If we don’t get anywhere in one or two weeks and the rhetoric in Washington just gets worse, markets could sell off quite a bit.”
Reporting by Vivianne Rodrigues, Arash Massoudi, Gregory Meyer and Michael Mackenzie in New York